Cost of Quality for Lab Leaders:

How to Recognize and

Eliminate Sources of Recurring

Bad Quality in Your Lab

Lucia M. Berte

www.LaboratoriesMadeBetter.com

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Schiffauerova A, Thompson T. A review of research on cost of quality models and best practices.

International Journal of Quality and Reliability Management, Vol.23, No.4, 647-669, 2006.

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Schiffauerova A, Thompson T. A review of research on cost of quality models and best practices.

International Journal of Quality and Reliability Management, Vol.23, No.4, 2006.

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Fact:

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“It’s cheaper to do the

job right the first time

than to recover from an error.”

Philip Crosby

A lab that didn’t “get it”…

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Baltimore Sun, August 13, 2004

Lab workers warned Md. General 2 years ago

Laboratory workers at Maryland General Hospital

warned top hospital administrators and state officials

in writing nearly two years ago of serious and long-standing

testing problems that put patients and employees at risk.

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Example: Recollected samples

Paid the direct cost for the rejected

sample

Labor

Supplies (collection, computer)

Lost the margin from the first collection

Paid direct cost for the second sample

Need direct cost for the next sample

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What’s the

cost of quality

in YOUR

laboratory

?

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Four Types of Quality Costs

Prevention

Appraisal

Failure

Internal

External

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Prevention Costs

Quality planning

Supplier capability

Process capability

Preventive

maintenance

Quality improvement

Meetings

Projects

Education

Training

Work process

training

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Appraisal Costs

Inspections

Incoming

In-process

Final

Internal Auditing

Sample tracing

Record tracing

Competence assessment

Equipment calibration

Quality Control

Proficiency testing

Outside accreditations

Method comparison

testing

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Internal Failure Costs

(before delivery)

Path of workflow

errors and problems

Rework

Reinspection

Retesting

Repair

Expired reagents

Nonconforming

material review

Downgrading

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External failure costs

(after customer receipt)

Customer complaints

Misdiagnoses

Report recalls

Lawsuits

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Cost of Poor Quality

Sigma

Level

Yield DPM COPQ

1 31% 690,000 Not competitive

2 69.1% 308,537 Not competitive

3 93.3% 66,807 24% to 40% of revenue

4 99.4% 6,210 15% to 25% of revenue

5 99.98% 233 5% to 15% of revenue

6 99.9997% 3.4 <1% of revenue

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Comparative Cost of Quality

Prevention Appraisal Failure

$ 1

Defect

prevention

efforts

$ 10

Inspection and

testing to catch

and correct

defects

$ 100

Customer finds

defects or is

dissatisfied with

services

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Failure cost as a function of detection point in laboratory processes

Failure cost $$$

Preanalytic

Practitioner action

Litigation loss

Analytic

Prevention

Post review

Result release

Correction before action

Laboratory Processes

Failure cost $

Failure cost $$$$$

Appraisal

Adapted from: Campanella J, ed. Principles of Quality Costs, ASQ Press, 1999.

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Co

st

0 Quality of conformance 100

The Cost of Quality

Adapted from Campanella J, ed. Principles of Quality Costs, ASQ Press, 1999.

Failure cost

QMS

cost

Total quality cost

You are here

You want to be here

Data from Industry

Industry COQ Basis Outcomes

Telecomm 23% 17% TOC Productivity 26%

Coatings 4.1% 2.5% Sales ROI = 1 year

Electronics 35% 8% TOC Productivity 25%

AC / Refrig 13.5 3.7% Sales Factory failures 96%

Software 65% 15% Project Rework 40% 6%

Payoff = 7.5x

Productivity 170%

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Schiffauerova A, Thompson T. A review of research on cost of quality models and best practices.

International Journal of Quality and Reliability Management, Vol.23, No.4, 2006.

One Hospital System’s

Experience 1.

2 JC/CAP NPSG related to patient ID

Goal of 50% reduction of specimen labeling errors

over 18 months, through… education

data collection and analysis

interhospital collaboration

[Every mislabeled sample needed recollection –

hence, failure cost incurred]

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Reducing errors in blood specimen labeling: A multihospital initiative. Pennsylvania Patient Safety Advisory, 2011 Jun; 8{2}:47-52.

One Hospital System’s

Experience 2.

Baseline rate = 0.1 to 4.1 errors per 1000 OFE

With1.3 million OFE, a range of 130 – 5330 errors

Applying slide 7 formula:

at $15.00/hr direct phlebotomy labor cost. and rate

of 5 phlebotomies per hour = $3 per phlebotomy

at direct supplies of about $10 per 1-tube collection

assuming a margin of $1

Failure costs of $14 + $13 + $13 = $40 each

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One Hospital System’s

Experience 3.

@ $40 failure cost per error = $5200 - $213,200

A 37% statistically significant decrease in errors

in the collaborative over the 18 month period

Post intervention error rate of 0.0 to 1.3 errors

Failure cost reduced to $0 for one hospital!

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Total Costs

Actual Cost

Real cost

of production

Cost of

failure

Margin

or profit

Waste Potential savings

or profit

Charge

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A Simple Solution?

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Determining Failure Costs

Use quality indicators

Total the failure cost elements

direct variable costs for the failure

direct variable costs for the replacement

revenue margin foregone for the failure

direct variable costs used for the next sample

Prepare failure cost reports

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Laboratory Path of Workflow

Failure Costs 1.

Preanalytic

Wrong orders

Wrong order entry

Unacceptable samples

Recollected samples

Accessioning and

processing errors

Analytic

Repeated tests

Incomplete test runs

(instrument issue)

Invalid test runs

(calibrator or control

failures)

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Laboratory Path of Workflow

Failure Costs 2.

Postanalytic

Result recalls

Reprinted reports

Redelivered reports

Remedial action on occurrences

Complaint resolution

Lawsuits

Management Infrastructure

Failure Costs

Forgone revenue from

lost customers

Lab safety accidents

Staff turnover and

replacement

Expired reagents and

supplies

Overstock

Equipment downtime

LIS downtime

TAT outliers

Resolving document

problems

Confidentiality violations

Resolving system

interface issues

Recurring NCE

“corrective actions”

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Sample Cost Structure

for one failure

$$ amount Initial Repeat Opportunity

Margin (profit) lost X

Expected return lost X

Administration costs X

Fixed / miscell. cost X

Indirect labor cost X

Indirect materials cost X

Direct labor cost X X X

Direct materials cost X X X

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Hidden Quality Costs

31 Fig. 13-3 with permission, from Harmening’s Laboratory Management Principles and Processes, 3rd ed., 2012.

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Quality-Based Costing Identifies

Non-value-added activities to be eliminated

Waste caused by poor quality

Areas where financial performance can be improved

Cost justification for needed corrective actions

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“Costs do not exist to be calculated.

Costs exist to be reduced.”

Taiichi Ohno

Ways to Eliminate Failure Costs 1.

Streamline processes

Process analysis and flowcharting

Six Sigma defect reduction, Lean, and 5S

Automation, where possible

Apply prevention

Design Failure Modes and Effects Analysis

Process validation – not only test methods!

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�Ways to Eliminate Failure Costs 2.

Reduce turnover

Training programs for all staff

Effective training

Competence assessment

Develop and use effective documents

Process-based

flowcharts

work instructions and job aids

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“For organizations that do not have a formal effort

to reduce chronic and sporadic problems,

operations managers often spend 30% of their time

on troubleshooting.

For the supervisors reporting to these managers,

the time consumed frequently exceeds 60%.”

Joseph Juran

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What’s the

cost of quality

in YOUR

laboratory

?

Take Home Message #1

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For each failure

there is a root cause.

Causes are preventable.

Prevention is always cheaper.

Take Home Messages 2-

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Know the 4 types of quality costs – P, A, IF, EF

Identify P and A costs on your lab’s budget.

Calculate IF and EF costs and prepare reports

Invest in P and A to IF + EF

Further investment in P (ie, CI) further A!

The language of the C-Suite is $$$$$$$

Talk their language to get attention!

No laboratory COQ model and software exists!

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Additional Resources

Elbireer A, Gable AR,

Jackson JB. Cost of quality

at a clinical laboratory in a

resource-limited country.

LabMed:41(7)429-433,

2010.

Berte LM. The Cost of

Quality. In: Harmening DM.

Laboratory Management

Principles and Processes,

3rd ed. St. Pete, FL, DH

Publishing and Consulting,

Inc. 2012

Wood DC. The Executive

Guide to Understanding and

Implementing Quality Cost

Programs. Milw, WI: ASQ

Quality Press, 2007.

Campanella J, ed. Principles

of Quality Costs, 3rd ed.

Milw, WI: ASQ Quality

Press, 1999.

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